Multifamily Investments U.S. Multifamily Report 2014 Review/2015 Forecast Investment Overview by Region Table of Contents Economic Outlook . 4 The Q2 Bounce . 5 Infl ation and Interest Rates . 5 Interest Rate Hikes Unlikely Before 2015 . 6 Investment Recap . 8 Are We Overbuilding? . 8 Statistical Recap—Pricing and Cap Rate Trends . 9 Statistical Recap—Vacancy and Rental Rate Trends . 10 Local Statistics . 12 Methodology . 38 Credits. 39 Economic Outlook general. In April, the Bureau of Economic Analysis (BEA) initially reported a fl at growth rate of just 0.1%, but as more numbers came Towards the end of 2013, the U.S. economy appeared to be in, those numbers were revised dismally and almost shockingly revving up. Real GDP growth averaged 4% in the second half of downward. Consumer spending took hits not just because of 2013. The nation’s housing market had fi nally begun to show the unusually cold weather, which kept shoppers home, but it signs of life by late 2012, and that had accelerated in 2013 also shrank as some fi scal austerity measures played out. The as shattered home prices fi nally showed a strong rebound and expiration of long-term unemployment benefi ts and cuts to food inventories dropped to pre-recession lows. Through the wealth stamps further reduced spending levels. Meanwhile, businesses effect, this helped to lift consumer spending, and the continued drastically reduced the pace of restocking and it was this last robust performance of the stock market seemed to be a formula factor (which tends to drive most GDP revisions) that helped to for greater economic growth in 2014. Subpar 2% GDP growth send fi nal Q1 GDP fi gures to their lowest levels since the onslaught Total U.S. Multifamily Deal Volume U.S. Multifamily Cap Rates/Pricing $100 8% $80 $70 $90 7% $60 $50 $80 7% $40 In Thousands $70 6% In Billions $30 $20 $60 6% $10 $0 $50 5% 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2007 2008 2009 2010 2011 2012 2013 2014 YTD Total Deal Volume Avg. Price Per Unit Avg. Cap Rates Source: Costar Group: Excludes Sales of Portfolios or Projects with less than ten units Source: Costar Group: Excludes Sales of Portfolios or Projects with less than ten units Through the fi rst half of 2014, total deal volume had topped $34 Through the fi rst six months of the year, the average cap rate on billion. The market is likely to close this year with more than $60 transactions we have tracked nationally was just 5.8%, but deals for billion in closed transactions, exceeding the pace of last year and core product in coastal and gateway markets are routinely trading peak levels posted prior to the recession. with caps of 5.0% or less. through the economy was widely anticipated to reach into the of the Great Recession. After revision (the largest on record since high 2% range, if not cross the 3% threshold—or what used to 1976, by the way), it turned out that the U.S. economy had not be deemed “normal” during typical growth cycles. only failed to grow in Q1 2014, but had contracted by a whopping -2.9%. This number was further revised in early August to -2.1%. Instead, one of the harshest winters in almost 15 years put the After all is said and done, Q1 2014 will go down as one of the deep chill on consumers, economic growth and the economy in worst-ever non-recession performances recorded by the economy. Lowest Vacancy Markets Highest Vacancy Markets Oakland/ San Jose San Diego East Bay Memphis Little Rock Jacksonville Sources: Cassidy Turley Research, Costar Group, REIS, Real Capital Analytics 4 | Cassidy Turley While the data presented within this report was gathered from sources that we deem reliable, we make no claim as to their ultimate accuracy. U.S. Multifamily Sector Analysis This was enough to dash the hopes of most analysts that 2014 consumption expenditures increased to 2.5% in the second real GDP growth would come in at 2.5% or greater. Following quarter, which more than offset the weather-induced decline from Q1’s weak showing, the Federal Reserve downgraded its forecasted the prior quarter and confi rmed that the consumer is confi dent growth rate for 2014 from between 2.8% and 3.0% to 2.1% to enough to continue to power economic growth. In general, the 2.3%. The Fed wasn’t the only one to downgrade its outlook. The data is tracking robustly for the second half of 2014. Job growth National Association of Business Economists lowered its consensus has been very strong—wage pressures are mounting and other forecast from 2.8% in March to 2.5% in June. reliable indicators on confi dence and the manufacturing sector are trending up thus far in Q3. The Q2 Bounce And then Q2 happened. The economy posted robust growth of 4.2% However, the geopolitical outlook has defi nitely taken a turn for the in Q2. Many economists who had downwardly revised their outlooks worse with the rise of ISIS in Iraq, the Malaysian airline disaster after Q1 are now boosting their forecasts. Strangely enough, Q2’s in Ukraine and the escalation of violence in the Israeli-Palestinian strong performance probably should not have come as a huge confl ict. Additionally, foreign trade has remained weak, and the surprise. This is because low inventory levels played a major role European and Asian economies continue to face challenges. Back in Q1’s negative growth. There have only been ten quarters since at home, the U.S. housing market continues to send mixed signals. the Great Depression in which GDP turned negative in what was While housing starts have shown inconsistent growth, existing otherwise an expansion period. In nearly every case, inventories home sales are up and new home sales surging. Meanwhile, played a role; and in nearly every case, they bounced back strongly builder sentiment is up but mortgage applications have been low. and boosted GDP growth in the following quarter. The average rate of So what we see is a housing market that continues to post modestly GDP growth in the quarters following each of those brief contractions improving numbers in a marketplace that had expected more. Still, comes out to a very strong 3.5%. In other words, inventories may the strong performance of Q2 and the continued strength of the have been a major factor behind Q1’s dismal numbers, but they U.S. labor market would seem to indicate that the economy will also helped to drive Q2’s strong rebound. But it wasn’t simply an continue to expand at a healthy pace over the fi nal half of 2014. In inventory quirk that explains the strong rebound. our baseline scenario, we expect Real GDP to average better than 3% for remaining 6 months. But for multifamily investors, the real In July 2014, the economy added more than 200,000 jobs for question is what does all of this mean for interest rates as we head the sixth consecutive month. Employers added 209,000 new into the fi nal half of this year and beyond? positions in July—the economy has averaged 244,000 new jobs monthly since February, which is the strongest eight month Infl ation and Interest Rates period the economy has recorded in eight years. Meanwhile, Janet Yellen, the new Chair of the Federal Reserve, has repeatedly middle and higher-wage industries are seeing some of the stated that her commitment to a monetary policy prioritizes strongest growth lately, and this is a factor that had largely been lowering unemployment and that the pure rate of unemployment missing throughout the entire post-recession recovery/expansion understates slack in the labor market. In this sense, she indicates period. Through June and July alone, higher-wage industries that wage infl ation and overall infl ation will lag behind broader like business services, construction and manufacturing added improvements in the nation’s employment. In fact, on August 22, 257,000 jobs while lower wage sectors like fast-food added just she stated that if the labor market gains “continue to be more rapid 210,000 new jobs. This is important because there is a strong than anticipated,” interest rates could rise sooner than expected. correlation between wage growth and consumer spending, and we know the latter accounts for 65-70% of GDP. But infl ation has picked up fairly quickly. All of the major indices (the PCE defl ator, CPI and PPI) are all running above 2% on an Consumer spending rebounded strongly in Q2, and that is the annualized basis over the past three months. The Fed has, so far, most encouraging data point in the latest GDP numbers. Personal been relatively dismissive of this emerging trend, as a good portion Highest Average Rent Lowest Average Rent New York San Francisco Boston Oklahoma City Little Rock Tuscon $3,187 $2,171 $1,898 $600 $699 $700 Sources: Cassidy Turley Research, Costar Group, REIS, Real Capital Analytics While the data presented within this report was gathered from sources that we deem reliable, we make no claim as to their ultimate accuracy. cassidyturley.com | 5 U.S. Multifamily Rent Rankings Housing is the single largest item in the CPI and accounts for nearly 32% of it. The fi gure is calculated via a complex formula Average Average Average that blends average rents and homeowner equivalent rents. One of Market Asking Rent Asking Rent Asking Rent the challenges here is that far too many Americans already spend 2012 2013 YTD 2014 more than 32% of their after-tax income on either their rent or 1 New York City, NY $3,040 $3,176 $3,187 mortgage payments.